Executive directors' pay-performance link and board diversity: evidence from high free cash flow and low-growth firms

Chwee Ming Tee

International Journal of Emerging Markets, 2021, vol. 18, issue 9, 2477-2500

Abstract: Purpose - The purpose of this study is to examine whether board diversity can attenuate weaker executive directors' pay-performance link in high free cash flow and low-growth firms (HFCF_LGRW). Design/methodology/approach - This study employed the Malaysian dataset from 2005 till 2016 and the fixed-effect model to investigate the developed hypotheses. The two-stage least squares method (2SLS) is employed to mitigate endogeneity issues. Findings - This study finds that a positive association between executive directors' pay and firm performance is weaker in HFCF_LGRW firms. However, board diversity, namely ethnic and gender diversity, can mitigate weaker executive directors' pay-performance link, indicating effective monitoring. Originality/value - This study is among the first to reveal that executive directors' pay-performance link is weaker in firms with HFCF_LGRW growth, consistent with Jensen's (1986) free cash flow hypothesis. However, findings suggest that this agency problem in HFCF_LGRW firms is attenuated by board diversity, namely ethnic and gender diversity. This supports the notion that diversity in corporate boards serves as an effective internal monitor.

Keywords: Executive directors' pay-performance link; High free cash flow and low-growth firm; Ethnic diverse board; Gender diverse board (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-11-2020-1379

DOI: 10.1108/IJOEM-11-2020-1379

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